Nvidia‘s (NASDAQ: NVDA) The company’s shares have risen more than 600% over the past two years, much of it driven by the growth of the AI market, which has boosted its sales of graphics processing units for data centers to handle complex AI tasks.
The growing market demand for data center chips continues to outpace the available supply, and analysts expect NVIDIA’s revenue to grow at a compound annual growth rate (CAGR) of 45% from fiscal year 2024 to fiscal year 2027 (which ends in January 2027). They expect its earnings per share to be (Earnings per share) to grow at a CAGR of 51%.
So, even though Nvidia is already worth over $3 trillion, it still has a lot of potential to make. Running roomBut before investors buy this soaring stock, they should watch out for these four red flags that could unexpectedly end its historic rally.
1. It’s all about AI chips
In fiscal 2022 (ending January 2022), NVIDIA generated 46% of its revenue from gaming GPUs, 39% from data center GPUs, and the rest from professional visualization, automotive, and OEM chips. However, that product mix changed completely over the next two years as its data center chip sales surpassed gaming chips.
In the first quarter of fiscal 2025, NVIDIA generated 87% of its revenue from data center chips, 10% from gaming chips, and the remaining 3% from its other segments. It generated $22.6 billion in data center revenue in that single quarter, compared to total revenue of about $27 billion in the previous quarter. everyone For fiscal year 2023. This impressive expansion has transformed Nvidia from a more diversified GPU manufacturer into a company focused entirely on AI chips.
That’s fine if you think Nvidia will continue to dominate the AI market as it expands. But if the AI market suddenly slows, Nvidia’s chip shortage could quickly turn into an oversupply. And if its data center business falters, it can’t count on growth in gaming and other smaller divisions to smooth out those year-over-year comparisons.
2. Facing unexpected organizational challenges
Nvidia’s overwhelming reliance on the AI market exposes it to a number of unexpected regulatory challenges. U.S. regulators have repeatedly tightened restrictions on its exports of AI chips to China, and that pressure could prompt Chinese chipmakers to accelerate the development of their own AI chips.
Tougher regulations on generative AI, already in place in Europe, could stifle the booming industry and push companies to limit their purchases of new AI chips. Complaints about mass plagiarism and other ethical issues could also force AI companies to expand at a slower, more conservative pace.
3. Facing clear competitive threats
Nvidia controls 88% of the discrete GPU market, according to JPR, but its main competitor AMD AMD has started rolling out cheaper AI accelerators. AMD’s MI300 Instinct GPUs have already outperformed Nvidia’s H100 GPUs — which cost about four times more — in terms of raw processing power and memory usage across several industry benchmarks. Intel Corporation It also recently claimed that its new Gaudi 3 AI accelerators are faster and more power efficient than Nvidia’s H100 GPUs.
supercomputerNvidia, which has grown rapidly over the past few years by producing dedicated AI servers powered by Nvidia chips, is also developing new servers optimized for cheaper AI accelerators from AMD and Intel. These cheaper servers could attract cost-conscious data center operators and erode Nvidia’s market share.
Meanwhile, Nvidia’s tight supply and high prices are pushing its major customers — including OpenAI, Microsoft, the alphabetGoogle, and Amazon — to develop their own AI accelerators. These chips won’t threaten Nvidia’s growth in the near term, but they could gradually loosen its iron grip on the massive data center market.
4. Those who are familiar with it are net sellers.
Nvidia stock isn’t cheap, with a forward earnings multiple of 49 times and a 26 times sales multiple of 2019. But if it has the potential to double or triple again in the near term, its valuation will look reasonable, and insiders should be buying more shares.
But over the past 12 months, insiders have sold more than four times as much Nvidia stock as they bought. Over the past three months, they’ve sold more than 52 times as much stock as they bought. These insider sales don’t necessarily mean the stock is headed for a cliff, but they are a worrying trend that suggests the upside in the near term is limited.
Is it still safe to buy Nvidia stock?
I think Nvidia stock is still worth buying, but investors shouldn’t assume it’s a perfect growth stock. Its transformation from a gaming company to an AI company was sudden, and it could face significant growing pains over the next few years. But assuming it can overcome all of these competitive, regulatory, and macroeconomic challenges, it will still be one of the easiest ways to profit from the secular expansion of the AI market.
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Susan Frey, CEO of Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo The Motley Fool has positions in Amazon. The Motley Fool has positions in Advanced Micro Devices, Alphabet, Amazon, Microsoft, and Nvidia and recommends them. The Motley Fool has positions in Intel and recommends the following options: Long January 2025 $45 calls on Intel, Long January 2026 $395 calls on Microsoft, Short August 2024 $35 calls on Intel, and Short January 2026 $405 calls on Microsoft. The Motley Fool has Disclosure Policy.
Nvidia Is One Of The Best AI Companies, But Don’t Ignore These 4 Warning Signs Originally posted by The Motley Fool
